Updated: Dec 16, 2021
The role of the doctrine of indoor management is opposed to that of the rule of constructive notice. The latter seeks to protect the company against the outsider; the former operates to protect outsiders against the company. The rule of constructive notice is confined to the external position of the company and, therefore, it follows that there is no notice as to how the company’s internal machinery is handled by its officers. If the contract is consistent with the public documents, the person contracting will not be prejudiced by irregularities that may beset the indoor working of the company.
As M/A & A/A of a Company are Public documents, there is a presumption that those who deal with the company are having 'Constructive notice' of their contents. This protects the company from outsiders. The doctrine of indoor management is opposed to the rule ofconstructive notice. It aims at protecting the outsiders against the Company's irregularities, Commissions and excesses. According to this strangers may assume that the proceedings are and everything is regularly done.
The leading case is Royal British Bank V. Turquand : In this case, the Directors borrowed money from the Plaintiff. The M/A of the Company had provided that the Directors might borrow, on bond, such sums as are authorised by the shareholder's resolutions.
The shareholders contended that there was no such resolution and hence not liable. The Court rejected this and held that the company was liable. This is called the 'Turquand Rule'. The court held, that when there is a provision to borrow there is a presumption, that the formalities have been observed by the directors, hence, they are acting lawfully(in bonam part em). Though the M/A and A/A are open for inspection by the public, the details of internal procedure are not so open. Hence, an outsider cannot know the day-to-day internal matters as he has no access to them. The doors are closed to him. Hence, the courts have evolved the rule of 'Indoor Management'. The rule is based on convenience, practical utility and justice. No Company should be allowed to take advantage of its own commission and omissions.
Other examples are : Defective appointment of a Director, Defacto exercise of Power, lack of quorum, etc. Outsiders cannot enquire into the regularity or otherwise of internal proceedings.
Power may be delegated expressly or impliedly. The Company is liable when such a power is exercised by a delegated person. The outsider dealing with the Company may rely on the authority of such officer of the company as delegatee.
(i) the transaction should be one which normally falls within his authority and
(ii) The A/A should have allowed such delegation. How the power is delegated, what formalities are observed is within indoor management and hence third party is protected.
In Freeman V. Buckhurst:
K and H formed a Company to improve an estate and sell. H went abroad. K appointed architects and surveyors, who did their jobs and claimed their fees. The plea that K had no powers was rejected by the Court. K had held out to be a Managing Director having such powers. Hence the Company was held liable.
Exceptions to the Rule:
i) Knowledge of irregularity: If the person who contracted with the company was himself a
party to the inside procedure, the rule will not apply.
In Howard V. Patent Ivory Mfring Co., the debentures required the resolution of a general body. Held, he could not take advantage of indoor management. The court held that the Company was not liable to D. The reason was, he had knowledge of the irregularity.
ii) Suspicion of irregularity: This becomes clear from the circumstances of each case. D, a
Director of two Companies transferred money from one to the other to pay off a debt; the court held that this was unusual and bad. Irregularity was patent.
iii) Forgery: The rule is not applicable to cases of forgery, committed by the officers of the Company. In Ruben's Case, two directors to roged the signature of another Director on the share certificate and negotiated the same. Held, Company not liable.
iv) Third Party's Ignorance of A/A : It is still a controversial issue. But, if the Director had ostensible authority, the company cannot escape liability to third parties (Rama Corporation case).
v) Acts outside authority: If an officer of the company acts patently beyond his powers, the indoor management rule cannot be invoked.
In Anand Bihari V. Dinshaw, the company's property was transferred by an accountant. Held, this was void. Even a delegation of power, clause could not have saved the position.